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With the radical re-orientation of policy since 1998, the Slovak Republic has created the institutions of a market economy and greatly enhanced market forces. Various structural reforms implemented since have raised the economy's productive potential and made it more resilient to shocks. Nevertheless, two imbalances stand out - a low employment to population ratio and a large current account deficit. These problems point to the need for both further structural reforms, especially in the labour market and the social welfare system, and macroeconomic measures to reduce the budget deficit. Meanwhile, monetary policy must continue to bear down on inflation, a task which will be made easier if budgetary consolidation is tackled. Failure to address the budget problem would leave the Slovak economy at risk, both in terms of the external deficit and the upward path of public debt. Spending restraint, which is essential to achieve the budget deficit target over the medium term, requires an ambitious overhaul of the social security and social assistance systems. Progress here is also needed to increase the incentives to work and to break any harmful links between unemployment and social protection. Enhancing wage and employment flexibility and promoting labour mobility, in part through a more efficient housing market, are also essential to encourage job creation. Improving labour market performance in the longer term depends on boosting the productivity of workers, notably through upgrading the education system. Further fostering a healthy business climate would also accelerate employment and output growth, in part by attracting greater inflows of foreign direct investment. In particular, making the bankruptcy framework an effective tool of corporate restructuring, following through on the privatisation of remaining state-owned enterprises and implementing the new competition policy law and corporate governance framework should help promote a vibrant enterprise sector. This should be accompanied by a continued upgrading of bank supervision to maintain the health of the restructured and privatised banking sector. In sum, reducing the government budget deficit and implementing structural reforms, particularly in the labour market, are crucial to maintain the expansion and accelerate the convergence with EU countries.